Colombia - Future trends

Most of Colombia's dilemmas at the beginning of the 21st century
are political rather than economic. The confrontation between guerrilla
groups allied to the narcotics industry has become highly delicate, and
is likely to remain so throughout the rest of the Pastrana presidential
period, which will end in 2002. This situation will also affect the
modernization of the political system and any economic recovery. Despite
a better structural situation than other countries in the region, the
continuous violence not only stops major advances, due to the uneasiness
of foreign investors, but also creates major incentives for the
emigration of the elite and professional groups. Putting all his eggs in
the basket of the peace process has led to frustration over the failure
of Pastrana's efforts. The weak economic performance has
additionally undermined the popularity of the president. His
administration has enjoyed strong support from the U.S. government,
which in 2000 agreed to an aid package of US$1.7 billion (Plan Colombia)
to combat illegal drugs in the south, southeast, and northern areas.

According to most sources, peace talks with the guerrillas that started
in 1999 continue against a background of violence. Although some
progress has been made, the conflict has escalated and the
guerrillas' commitment to ending the hostilities is questionable.
Negotiations with the largest guerrilla group, the Fuerzas Armadas
Revolucionarias de Colombia (FARC), have followed a stop-and-go trend,
stagnating for half a year and then resuming after continuous
confrontations. So far the clashes have not ended. Pastrana and his
successor are likely to come under increasing pressure to abandon talks
and opt for a purely military solution if progress continues to prove
elusive. Despite the eventual promise of military support from the
United States, it is unlikely that such an option will be followed,
mostly because of the risks involved in an open civil war against
well-armed and widely dispersed guerrilla forces. Also, the peace talks
still enjoy the support of important civil sectors, including the Church
and non-government organizations (NGOs). While Bogotá continues to
try to negotiate a settlement, neighboring countries worry about the
violence spilling over their borders.

Colombia's leading exports, oil and coffee, face an uncertain
future. New exploration is badly needed to offset a pending decline in
oil production, and the coffee harvest has dropped because of aging
plantations and natural disasters. The lack of public security is a key
concern for investors, making progress in the government's peace
negotiations with insurgent groups an important driver of economic
recovery. Net foreign direct investment fell to about US$675 million in
1999 from US$2.5 billion in 1998, reflecting poor business confidence.
The tide changed again in 2000, more than doubling the previous figure
amid lower interest rates, greater oil investment, and privatization.
Officials are also offering better contract terms to encourage greater
foreign investment in the oil industry. In spite of pipeline bombings
and kidnappings, current oil prices remain a powerful incentive for
further oil investments, especially since Colombia's untapped oil
reserves are estimated to be huge. According to the International Energy
Agency, oil production is expected to top 1.2 million barrels a day
within the next 5 years and show little decline through 2020.

Despite the end of the recession, investor sentiment and economic
recovery will remain vulnerable to further troubles in the beleaguered
financial sector and the delicate peace process.